What is a credit score?
A credit score is a number/ranking of a person’s credit worthiness, based on an analysis of their credit history. It is calculated by credit bureaus using information from various sources, such as credit card companies, banks, and loan providers, and reflects a person’s ability to manage their debt and make payments on time. Credit scores in South Africa range from 0 to 999 , with a higher score indicating better credit health and a lower score indicating increased risk to lenders. A good credit score is typically considered to be 670 or above, while a score below 600 may make it more difficult to secure loans and favourable terms for credit.
Why is having a good credit score important? A good credit score is an essential aspect of managing your finances. It has a significant impact on your ability to borrow money, secure loans (for houses or cars), and access other financial tools and resources. This allows you to get better borrowing options, lower interest rates and increased approval odds.
With a good credit score, you may be able to qualify for loans and credit cards with more favourable terms, such as lower interest rates (how much you will need to pay the bank for money they lend you) . This makes it easier and more affordable to borrow money when you need it.
A good credit score can also increase your chances of being approved for credit cards, loans, and other forms of financing. Before you get a loan you need to apply for one with a bank, the bank will look at your application and then decide if they are willing to approve that loan. Having a good credit score helps with the chances of approval. It can also result in lower interest rates on loans, which can save you money over time. For example, if you take out a loan with a lower interest rate, you will pay less in interest over the life of the loan.
So how do you start building a credit score?
- Get a credit card: One of the easiest ways to start building your credit score is by getting a credit card. Choose a card that is suitable for your credit level, if you are a student then there are some great free options (more info later).
- Use the credit on that credit card. How credit cards work is that they give you extra money to spend on top of any money that you put in. You will utilise your credit whenever you start using the money that the bank is lending to you. If you are approved for a credit card with R1000 overdraft that means that the bank will lend you R1000 when any money you have in the account is finished. It is important to use this credit as this is seen as you “taking a loan” from the bank / using credit.
- Even more importantly is paying back the amount that you use from your credit overdraft. Paying back the credit the bank has lent you shows them that you are trust worthy and this is what builds your credit score. Most credit cards have a certain amount of time in which you need to pay your credit back otherwise you will need to pay it back with a certain interest rate. Every month you should sped a bit of money in your overdraft and then pay it back at with in a week or two.
- Repeat step 2 & 3 every month and watch your credit score rise. Using the full amount of your allowed credit is not recommended. Using between 30%-50% indicates good credit management.
You can monitor your credit score for free on a website or app like ClearScore.
If you are South African student:
The best method that I have found is to get a student credit card. I can recommend the ABSA student credit card, it had 0 start up fees and 0 monthly fees and it gives you 3 Bidvest airport lounge visits per year (with a preferential rate after that). Here is a quick summary of the product but you can find more information on their website.
ABSA:
- 57 days interest free ( you have 57 days to pay back the money you have spent that was loaned to you before you have to start paying interest on that amount).
- No transaction fees
- No monthly payments.
- Requirements:
- Minimum monthly allowance of 18.
- Documents: RSA ID, proof of residence, proof of income for three consecutive months.
- You must be a registered full-time student at an FET college, SAQA-approved institution, university, university of technology or private institution.
- Visit an ABSA branch.
- 3 Bidvest lounge visits per year (free food and drinks, wifi, showers, comfortable chairs), preferential rates after that.
- R1 000 000 in travel insurance.
Nedbank also has a student credit card option but this has a monthly fee and does not have as many benefits as the ABSA option.
Nedbank Dezign Credit Card:
- 55 days interest free credit (21% after that)
- Free cash withdrawals at Nedbank ATMs
- R500 limit
- available to full-time students at a registered university who are aged between 16 and 26 years.
- Monthly fee of R5
Tips for managing your score:
Limit new credit applications: Every time you apply for credit, it results in a hard inquiry on your credit report, which can have a negative impact on your credit score. Limit the number of new credit applications you make, and only apply for credit when you truly need it.
Remember that if you do not payback your overdraft then your credit score will decrease. It will be the same with phone contracts or store cards. These can all influence your credit score in both a good or bad way depending on your action.
I hope you found this interesting. Please note that this is not financial advice and is only intended for educational purposes.
Owen Venter 